Analysis: Even after hiring bankers, RIM running out of options

TORONTO/NEW YORK BlackBerry maker Research In Motion Ltd may be running out of options as it struggles to turn around its slumping fortunes with the help of a coterie of investment bankers.

The bankers - including leading M&A specialists from Royal Bank of Canada and J.P. Morgan - will explore options as drastic as an outright sale, one of the alternatives that RIM seems determined to avoid.

But analysts and investors doubt that anyone is ready to buy the whole company at this time, despite a price that looks tantalizingly cheap on paper. Interest in RIM looks slim to nil, two sources close to the matter said.

RIM's market capitalization is now $5.5 billion, down from $84 billion at the company's peak in 2008. It has $2 billion in cash, no debt and patents that experts say could be worth $2.5 billion.

"You are not going to sell RIM whole," said Charter Equity analyst Edward Snyder, who has covered RIM since its Nasdaq initial public offering in 1999. "The biggest problem RIM faces is that it's a very illiquid market in suitors for its phone business."

"There's very few companies that could exploit RIM's (hardware) assets to make a go of it. Those who can are already beating the pants off RIM."

RIM virtually invented on-your-hip email with its first BlackBerry device in 1999 and enjoyed almost a decade as a market darling, with quarter after quarter of soaring sales.

But it has hemorrhaged market share in the last few years, fading almost to irrelevance in a market dominated by Apple Inc's iPhone and devices from the likes of Samsung Electronics Co Ltd using Google Inc's Android software.

RIM shares sank to a eight-year low of just over $10 on Wednesday after the company said the day before that it expected to report an operating loss this quarter, its first in seven years

The company also said "significant" job cuts were on the way. Two sources told Reuters last week that up to 6,000 of RIM's 16,500 jobs could go by early next year.

LBO WOULD FACE OBSTACLES

Breaking up the company for a piecemeal sale is also a possibility, but an unlikely one given the complexity of such an action and management's reluctance to contemplate such a move.

A leveraged buyout may be a more likely outcome, although it also faces a number of obstacles. Private equity firms have circled RIM over the past two years and have tried without success to figure out ways to buy the company.

Another option is to shut down the device business, admitting that the BlackBerry cannot compete with Apple and Android, to focus on RIM's secure network operations and its patented technology.

But the sources said closing the device business would be a costly endeavor. "The device business is too volatile," one of the sources said.

RIM management, backed by the board, is fixed on a path to recovery that keeps its services business exclusive to BlackBerry, pinning its hopes on next-generation BlackBerry 10 phones it says will come later this year.

That's an apparent turnaround from the policy put forward by former co-CEO Jim Balsillie, who sought to offer RIM's secure data-crunching network to others for a fee.

Balsillie left the company earlier this year after his plan to radically shift RIM's strategy was rejected, sources with knowledge of his plan told Reuters last month.

RIM'S LARGEST CUSTOMER

RIM's security-focused network remains one of its biggest assets. It reaches behind corporate firewalls and taps into mobile networks globally to provide a framework that is unique among handset makers.

The Pentagon, for example, is RIM's largest single customer, with an estimated quarter-million of its 78 million subscribers.

"There is in my view still time to restructure around the services business as a going concern or sale, but time is running out" said Mike Abramsky, a former RBC analyst who left the bank several months ago and urged a split last year.

Another option the bankers might consider would be for RIM to create a separate company to house its patents. RIM could then arrange a licensing deal with this new company before selling it. Canaccord Genuity analysts value RIM's patent portfolio at $2.5 billion.

Licensing of its operating system is seen as unlikely, at least until BlackBerry 10 proves itself in the marketplace, and that is far from a given.

Initial previews of the software show a fluid, touch-based interface, and developers like how it easy it is to build applications for new devices with the HTML5 web coding language.

But the likely October launch of an initial device will pit new BlackBerrys head-to-head with a likely iPhone 5. RIM's PlayBook tablet computer, the first device to use its new operating system, bombed with consumers.

Meanwhile RIM's inventory, the components and finished devices it still holds, ballooned above $1 billion in mid-2011 and only dipped below that mark in December as RIM wrote down the value of the goods by almost $500 million.

Inventory bounced up again in the last quarter despite further write-offs, and RIM is widely expected to book more costs as it cuts prices on its older stock to get it out the door.

(Editing by Janet Guttsman)

(This story has been corrected to add missing word in paragraph 1)

A logo of the Blackberry maker's Research in Motion is seen on a building at the RIM Technology Park in Waterloo April 18, 2012.
REUTERS/Mark Blinch

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